What are Net Free Reserves?
Net free reserves is a measure of how much cash a bank holds above the Federal Reserve's required minimum. The opposite of net free reserves is net borrowed reserves.
How Do Net Free Reserves Work?
The formula for net free reserves is:
Net Free Reserves = Total Reserves - Minimum Required Reserves
Banks that accept deposits are required to have a certain amount of cash on hand at all times, called reserves. If a bank more than enough cash on hand on a given day, it might lend out the extra reserves to other banks.
The Federal Reserve releases net free reserve data every week.
Why Do Net Free Reserves Matter?
Banks usually accrue net free reserves when interest rates are falling, demand for loans is dropping off, and/or the bank thinks federal monetary policies might loosen. When the Fed loosens its monetary policy, banks usually need to borrow less of their required reserves and net free reserves rise.
Net free reserves can be used to predict interest rate changes. For instance, an increase in net free reserves usually means that demand for loans is falling and interest rates might fall accordingly.